Revenue Recognition

Question 1

Revenue Recognition - Core Principle

Answer 1

1. Revenue is to be recognized upon the transfer of promised goods and services to customers; and
2. The amount of revenue recognized represents the consideration the entity expects to receive in exchange for those goods and services

Question 2

Revenue Recognition - 5 Step Process

Answer 2

1. Identify contracts with customers.
2. Identify all separate performance obligations within each contract
3. Determine the total consideration for the contact
4. Allocate the total consideration among the separate performance obligations
5. Recognize revenue, either:
   - When the entity has satisfied its performance obligations (delivered products)
   - While the entity is satisfying its performance obligations (providing services)

Question 3

Revenue Recognition - Step 1 (Contracts)

Answer 3

An arrangement between two or more parties that creates legally enforceable rights and obligations, which conform to the following four criteria:

• The parties have approved the provisions and have committed to perform.
• The rights and the payment terms in the contract must be identifiable, though not necessarily explicit.
• The contract has commercial substance.
• Collection is probable

Question 4

Revenue Recognition Accrual Method

Answer 4

Recognizes all revenue and profit on sale in the period of sale with a provision for bad debts, used when collection is reasonably assured and the degree of uncollectibility is estimable.

Question 5

Revenue Recognition - Step 2 (Performance Obligation)

Answer 5

Is an enforceable promise to transfer goods or services to a customer. Identified at the inception of the contract.

Question 6

Revenue Recognition - Step 2 (Distinct Performance Obligation)

Answer 6

Meet two criteria:

• The customer must be able to benefit from the good or service on its own or together using other resources that are readily available to the customer; and
• The promise to transfer the good or service is separately identified from other promises in the contract.

Question 7

Warranties

Answer 7

Assurance Type - Protects the customer from obtaining a product that is not capable of performing at the level that the seller indicated that it would.

Service Type - Provides a customer with repairs in the form of parts and labor in addition to making certain that the product performs as was promised.

Question 8

Revenue Recognition - Step 3 (Transaction Price)

Answer 8

Is the amount of consideration that the entity expects to be entitled to in exchange for transferring goods or services in a satisfactory manner.

Question 9

Revenue Recognition - Step 3 (Variable Consideration)

Answer 9

Is a factor when either the customer has a valid expectation that the seller will accept less than the contract amount in the form of a discount, rebate, refund, credit, or other price concession; or facts indicate that the seller intended, as of the inception of the contract, to make a price concession.

Question 10

Variable Consideration - Expected Value Approach

Answer 10

Different amounts that will be obtained based on various levels of performance will each be assigned a probability with the total of the probabilities equaling 100%. Each amount is multiplied by the probability of achieving it and the total is the expected amount of variable consideration.

Question 11

Variable Consideration - Most Likely Amount Approach

Answer 11

Different outcomes are each assigned a probability that the total of the probabilities equals 100% and the outcome with the greatest probability of occurrence is assumed to be the amount that is to be recognized.

Question 12

Revenue Recognition - Step 4 (Standalone Selling Price)

Answer 12

Is the price the entity sells a good or service for separately in comparable transactions.

Question 13

Revenue Recognition - Step 4 (Discounts)

Answer 13

Equal to the difference between total of standalone sales prices and total consideration, allocated proportionately among performance obligations. May be allocated to some but not all performance obligations when 4 criteria apply:

• Each distinct good or service in the contract is also sold as a standalone good or service on a regular basis
• Some discount goods and services are also sold as a bundle at a discount
• The discount on the contract is comparable to the discount on the distinct goods and services sold in a bundle as a discount
• If allocated to some, but not all performance obligations, the residual approach is not applied until after the discounts have been allocated.

Question 14

Revenue Recognition - Step 4 (Step Basis)

Answer 14

First, the discount that applies to the smaller bundle will be allocated among the items in that bundle.
Next, the remaining discount is allocated among all items using the standalone sales prices for those items were not included in the small bundle and using the standalone sales prices minus the discount already allocated to the items in the small bundle.

Question 15

Revenue Recognition - Step 5 (Satisfied)

Answer 15

A performance obligation is considered satisfied when the entity has transferred the promised goods or services to the customer, which occurs when the customer has control of those goods or services.

Question 16

Revenue Recognition - Step 5 (Satisfied over Time)

Answer 16

Any one of the following three circumstances will indicate that a performance obligation is being satisfied over time and, as a result, revenue will be recognized while the the performance obligation is being satisfied.

• The customer consumes the goods or services as they are being delivered;
• The costumer has control over the asset while it is being created or enhanced; or
• The entity has no alternative use for the goods or services and is entitled to payment for performance completed to date.

Question 17

Revenue Recognition - Step 5 (Output Method)

Answer 17

The measurement of progress made on a project by evaluating the amount accomplished in relation to the completion of the entire project, often requiring the expertise of a consultant, such as an engineer.

Question 18

Revenue Recognition - Step 5 (Input Method)

Answer 18

A method of measuring the progress made on a project by comparing the total costs incurred to date to the total estimated cost, which provides the cumulative percentage of completion to date.

Question 19

Onerous Performance Obligations

Answer 19

Expected cost of satisfying a performance obligation is greater than the amount of revenue allocated to that performance obligation thus incurring a loss which will be recognized immediately

Question 20

Installment Sales Approach

Answer 20

Recognizes revenue and profit on sale in proportion to collections, used when collection is not reasonably assured and the degree of uncollectibility is not subject to reasonable estimation.

Question 21

Gross Profit %

Answer 21

The portion of the proceeds from an installment sale that exceeds the cost, calculated as:

Gross Profit / Amount of Installment Sale

Question 22

Gross Profit Recognized

Answer 22

The amount of profit from an installment sale that is recognized in the current period, based on cash collected, calculated as:

Cash Collected * Gross Profit % = Gross Profit Recognized (on Income Statement)

Question 23

Deferred Gross Profit

Answer 23

The portion of profit from an installment sale that has not yet been recognized in income, calculated as:

A/R balance * Gross Profit % = Deferred Profit (on Balance Sheet)

Question 24

Cost Recovery Method

Answer 24

Recognizes all cash receipts as a recovery of cost and only recognizes profit when collections exceed cost, used when collection is not reasonably assured, to a greater degree than when the installment method is used, and the degree of uncollectibility is not subject to reasonable estimation.

Question 25

Completed-Contract Method

Answer 25

The recognition of profit on a long-term construction contract in the period in which the project is completed, applied when either total cost or progress toward completion cannot be measured reliably.

Question 26

Estimated Total Profit

Answer 26

Total Contract - Estimated Total Costs

Question 27

Percentage-of-Completion Method

Answer 27

The recognition of profit on a long-term construction contract throughout the project’s period.

Question 28

Construction-in-Progress (CIP)

Answer 28

An inventory account that increases as costs are incurred and profit is recognized.

Question 29

Gross Profit in Current Period

Answer 29

Gross Profit to Date - Gross Profit to Date at End of Last Period

Question 30

Progress Billings

Answer 30

The cumulative amount of the total contract that has been billed to the customer.

Question 31

Costs and Profits in Excess of Billings (Costs in Excess of Billings for Completed Contract)

Answer 31

An amount reported as a current asset equal to the total of construction in progress minus progress billings for those contracts where construction in progress is greater.

Question 32

Billings in Excess of Costs and Profits (Billings in Excess of Costs for Completed Contract)

Answer 32

An amount reported as a current liability equal to the total of progress billings minus construction in progress for those contracts where progress billings is greater.